QUESTION 1 Total 17 marks There are two stocks listed in the market. The information of the two stocks is given below: Stock Price at year beginning ($) Forecasted price at year end ($) Forecasted dividend in the year ($) Variance of returns (%) Boeing 100 105 10 25 J.P. Morgan 160 172 16 36 David, Simon and Christine have $100,000 of funds to invest in the market respectively. Each of them has different investment strategies: Minimum risk portfolio, margin purchase and short sale. Required: a) David wants to invest his $100,000 in the minimum risk portfolio of the two stocks. The correlation coefficient of returns between the two stocks is 20%. What is the expected rate of return and standard deviation of Davids portfolio? (6 marks) b) Simon wants to trade the stocks by margin purchase, which requires initial margin ratio of 50% and interest charge of 10%. If Simon invests all his $100,000 as initial margin to buy one of the stocks, what is the maximum total $ return and rate of return achievable on his investment? [Hint: you must correctly decide to buy which stock can achieve maximum return]. (4 marks) c) Christine wants to trade the stocks with short sale, which requires initial margin ratio of 50% and no other fee charge. If Christine invests all her $100,000 as initial margin to short sell one stock and buy the other stock with the proceeds from short sale, what is maximum total $ return and rate of return achievable on her investment? [Hint: you must correctly decide to buy which stock and short which stock can achieve maximum return]. (4 marks) d) What are the purposes for margin purchase and short sale respectively? Discuss their risks in comparison with other normal trading. (3 marks)